Appraisal Institute Annual Meeting
IRS Valuation Topics
August 15, 2013
Presenters:
Joseph C. Magdziarz, MAI, SRA
Appraisal Research, Inc. – Rockford, Illinois
 2011 president of the Appraisal Institute
 Past president of the Chicago Chapter of the Appraisal
Institute
 Past National Chair of Education Committee of the Appraisal
Institute
 Past National Chair of the Audit Committee of the Appraisal
Institute
 Approved Appraisal Institute instructor for 26 courses in the
Appraisal Institute’s QE, AE, CE, and USPAP curriculums.
Includes courses prepared for IRS issues such as Conservation
Easements.
Presenters:
Terry Dunkin, MAI
Dunkin Real Estate Advisors - Lutherville, Maryland
 2007 president of the Appraisal Institute
 National Chair of International Relations Committee of
the Appraisal Institute
 He also holds the CCIM designation from the CCIM
Institute.
 He served on the American Real Estate Society Board
from 2007 through 2012, and was recently re‐elected to
serve a term expiring in 2017.
Presenters:
Eric Garfield, MAI
WTAS – Los Angeles, CA
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Co-Chair 2010 – 2013 IRS Valuation Summit in Los
Angeles, California
2011 President of the Beverly Hills Estate Planning
Council
2012 LDAC Discussion Leader
Active as Southern California Chapter Board
Member, Committee Chair, and Regional
Representative
Presenters:
Chase Magnuson, CCIM, CIPS, SRES
Real Estate for Charities – Washington, DC
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More than 30 years experience as a commercial
real estate broker.
He is a good client for appraisers and retains
hundreds of appraisers each year to prepare
valuations for IRS-related transactions.
Frequent lecturer to appraisal groups, non-profits,
universities, and others.
Previously a columnist for the San Diego Daily
Transcript where he reported on trends in real
estate donations.
AGENDA:
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Organization of IRS Valuation Section - Dunkin
Appraiser Penalties – Garfield
What are issues for donations - Magnuson
Do’s and Don'ts in Conservation Easements Magdziarz
Common Problems with Valuations for IRS –
Dunkin & Magdziarz
Tax Court Decisions – Garfield
- Mitchell
- Boltar
- Mohammed
Overview of IRS Valuation Division
1.
2.
3.
4.
Engineering and Valuation
Appraisal Standards
What they do
Standards
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Engineering and Valuation Specialists
Territory Map
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Engineering and Valuation
The primary function of the Engineering Program:
• Provide specialists with expertise and specialized
training in technical or industry-specific issues.
• Provides valuation services for a variety of
purposes.
• Coordinate the use of outside fee or contract
appraisers and experts.
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Appraisal Valuation Standards
The IRS Appraisers, Business Valuation Specialists,
engineers and foresters adhere to Generally Accepted
Appraisal Standards which include:
–USPAP
–IRS Valuation Standards
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Where does IRS Valuation Team
get its work?
Referrals from:
• Estate and Gift Tax Program
• SBSE (Small Business – Self-Employed Division
• LB&I (Large Business and International Division)
• TEGE (Tax Exempt and Government Entities Division)
• Collection
• Counsel (Office of IRS Chief Counsel)
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What Does IRS Valuation Group Do?
Appraisers mostly involved with income tax and
estate and gift tax issues. Work includes:
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Write Appraisals
Review of appraisals (Reasonableness)
Experts in litigation (sometimes testifying expert)
Appraiser penalty investigations
Outreach (seminars and meetings)
Contact representatives (COTR)
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Typical Internal Referral for Appraisal Assistance
• When the appraiser or BV Specialist gets a valuation
assignment, the first thing they will do is ask for the appraisal.
• Assigned appraiser then reads the report. Addresses following:
o Does the report read well—is it easy to follow?
o Does the report logically leads the reader from the initial
presentation of the data to the value conclusion?
o Are conclusions supported by facts and the analysis of the
facts?
o Is there a good market analysis?
o Does H&BU make sense?
o Is the issue worth pursuing?
• Assigned appraiser then makes report to referring department.
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Appraiser Penalties
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6695A Appraiser Penalty
 Prior to PPA penalties subject to IRC 6700 or IRC 6701
 IRC 6695A Originated with the Pension Protection Act of
2006
 Not intended for minor differences of opinion
 Treated as a separate case from originating tax case
 Practitioner has opportunity to support their work
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6695A Appraiser Penalty
6695A. Substantial and gross valuation misstatements
attributable to incorrect appraisals.
6695A(a) Imposition of penalty. – if –
6695A(a)(1) a person prepares an appraisal of the
value of property and such person knows, or
reasonably should have known, that the appraisal
would be used in connection with a return or claim
for refund, and
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6695A Appraiser Penalty
6695A(a)(2) the claimed value of the property on a
return or a claim for refund which is based on such
appraisal results in a substantial valuation
misstatement under chapter 1, a substantial estate
or gift tax valuation understatement, or a gross
valuation misstatement , with respect to such
property, then such person shall pay a penalty in
the amount determined under section (b).
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6695A Appraiser Penalty
6695A(b) Amount of Penalty. – The amount of the
penalty imposed under subsection (a) on any
person with respect to an appraisal shall be equal to
the LESSER of –
6695A(b)(1) the greater of –
6695A(b)(1)(A) 10 percent of the amount of the
underpayment attributable to the misstatement
described in subsection (a)(2), or
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6695A Appraiser Penalty
6695A(b)(1)(B) $1,000, or
6695A(b)(2) 125 percent of the gross income received
by the person described in subsection (a)(1) from
the preparation of the appraisal.
6695A(c) Exception. -- No penalty shall be imposed under
subsection (a) if the person establishes to the satisfaction of
the Secretary that the value established in the appraisal was
more likely than not the proper value.
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6695A Penalty Summary
• Should the practitioner be afraid or worried
about performing work for the taxpayer or the
IRS?
• At the end of the day, no, if the work
performed is a reflection of the market’s
perception of value as of the date of
valuation, analysis and conclusions are well
prepared, issues disclosed, and fully
presented!
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DONATIONS
1. Use of appraisals
2. Methods and reporting requirements.
3. Form 8285
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CONSERVATION EASEMENTS
1. What are conservation and historic
preservation easements & why are
they donated
2. Methodology
3. Problems with easement appraisals
- Highest and best use
- Incorrect methods
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COMMON PROBLEMS
IN APPRAISALS FOR THE IRS
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5.
6.
Writing
Grammar
Clarity
Highest and Best Use
Case Studies
Valuation Red Flags
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Writing
• It is important that appraisals written by IRS
appraisers and taxpayers’ appraisers are well
written. A well written appraisal is easy to
follow and will hold the reader’s interest. It is
easier to understand the analysis and the
conclusions reached.
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Grammar
• “The residence was a merely composed of
homesteaders, miners, loggers and cattle and
sheep ranchers.”
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Grammar
• “As mentioned several times throughout this
review, the valuation of the subject property
consisting of 40 acres and should have concluded
from the fee simple valuation on page 155 at a
value of $110,000 based on the appraiser’s
calculations.”
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Is this the word you want to use?
• “The subject property consists of two
contiguous tracts which contain 41 acres and
76 acres, respectfully.”
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What are you saying?
• “The appraisers’ approach, which is labeled as
Scenario “B,” the foregone development opportunity,
is the before value, and that the after value, Scenario
“A,” value of the raw land less the cost to remove the
land from the flood plain, is the after value. In fact,
Scenario “B” is not applicable, Scenario “A”, without
deducting the cost to remove the land from the flood
plain, is the before value, and there is no after value
calculated.”
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Highest and best use
Is highest and best use explained and
supported?
Legally permissible
Physically possible
Financially feasible
Maximally productive (use that generates highest
land value)
• Not the best three out of four!
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Some H&BU Problems
• Estate Gift- House and land appraised as apple
orchards.
• House on 10-acres w/direct ocean view in area of
million dollar homes. Brand new mansion next to the
subject as of appraisal date.
• Subject- appraised as “old” barely producing apple
orchard. Lower value- Did not use residential acreage
that had direct ocean views. Used other orchardsbottom line- Highest & Best Use-high end estate land
more valuable.
• Adjustment $5,000,000 higher
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Case #2
• 1- acre oceanfront residential site- donated to a
municipality.
• Appraised as buildable-with incorrect legal description
offered by owner. One week before the owner donated
piece of subject reducing size, never told appraiser.
Appraiser never checked with municipality to verify
property.
• Consequences-Highest and Best Use reduced to open space,
non-buildable land- large adjustment-lower value.
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Case #3
• Estate Gift- 10-acre marina on the ocean
• Highest and Best Use- Marina on the Ocean
• Problem areas-land value too low- zoning allows
for residential development.
• Oceanfront land in demand for residential
development. Value higher if appraised as
vacant for residential development
• Problem- appraiser states in the report :
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Case #3 continued
• "However when a comparison of the Income Approach for
the marina operation with the Market Data Comparison
Approach for the land in the Cost Approach, it is concluded
that the total site is under utilized. There is a strong
potential for a combination residential/tourist
accommodation/commercial use in conjunction with the
marina operation, which is considered to the Highest and
Best Use. A specific redevelopment plan needs to be defined
and is beyond the scope of this appraisal assignment.”
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Some Valuation Red Flags
• Conclusions based on opinion and not facts
Facts Trump Opinion
• Reliance on unconventional analysis (not widely used
or accepted) will raise a red flag.
• Extreme discounts for marketability, fractional
(minority) interest, blockage, undivided interest, that
are not well supported by data and analysis.
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continued
• If analysis is thorough and explained and consistent with the
conclusions reached, we are more likely to accept. If not, we
will spend the time to look into the issues.
• If analysis explains why some potential comparables were
not used rather than simply not commenting on those
potential comparables, we may conclude that the rationale
makes sense.
• If all comparables are adjusted in one direction, we will get
curious.
• Are assumptions reasonable?
• Does it make sense that past earnings growth will continue?
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So, What’s my Point?
• If an Appraisal is well written and easy to follow,
• If it logically leads the reader from the initial
presentation of the data to the value conclusion.
• if conclusions are supported by facts and the
analysis of the facts
• If H&BU makes sense
The appraisal will probably not be challenged
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COURT CASES
1. Mitchell
2. Boltar
3. Mohammed
4. Astleford
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Mitchell v. Commissioner –
T.C. Memo. 2011-94 (April 2011)
Summary:
• Two Properties – An Ocean-front house in Montecito, CA
and a 4,000 acre ranch property in Santa Ynez, CA
• Both Properties were subject to long-term leases.
• IRS claimed leases were not at market and should be
ignored.
• Issues were:
Treatment of leases.
Use of sales and adjustments
Methodology
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Mitchell v. Commissioner –
T.C. Memo. 2011-94 (April 2011)
Properties:
 Beachfront property – 2 acre lot with 4,000 s.f.
house in Montecito. 167 feet of ocean frontage.
Leased for 5 years with three 5-year options.
First year rent was $190,000 with 3.5%
adjustments annually.
 Ranch – 4,000 acres in Santa Ynez Valley. Leased
for $32,000 per year. Lease was 5 years with four
options to renew. Rent increased $1,000 per
year.
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Mitchell v. Commissioner –
T.C. Memo. 2011-94 (April 2011)
Appraisals and Valuation Method – Beachfront Property:

Taxpayer appraiser valued the Beachfront property at $14.5 million
in fee simple assuming the lease did not exist. He then increased
the fee simple value at 3.5% annually to the end of lease term and
options. As the rent was below market, he assumed the lease would
continue through all the option periods. The PV of the reversion was
$4.6 million at a 9.5% discount rate. PV of income was $1.4 million.
Total value of leased fee was $6.0 million. This was a very tradition
discounted cash flow analysis.

IRS appraiser valued Beachfront property at $12.5 million using a
lease buyout analysis. He indicated that a $250,000 payment would
be adequate make the tenants terminate. He essentially ignored the
lease because he noted that the lease was not really valid as
expenses exceeded income.
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Mitchell v. Commissioner –
T.C. Memo. 2011-94 (April 2011)
Appraisals and Valuation Method – Ranch Property:
 Taxpayer appraiser valued the ranch using a similar method
and valued the leased fee interest in the ranch at $3.5
million. He estimated fee value at $13.0 million.
 The IRS Appraiser valued the leased fee interest in the
ranch at $20.0 million. He used the same type of lease
buyout analysis.
Court Value Decision:
The Court adopted both of the Taxpayers conclusions
which relied on the traditional DCF analysis. The IRS
reports were disregarded due primarily to flawed
methodology.
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Mitchell v. Commissioner –
T.C. Memo. 2011-94 (April 2011)
What are lessons learned?
• Do not try to use unusual methods (like a lease buy-out analysis)
unless you have a very strong case for using it. The Court cited the
Appraisal of Real Estate repeatedly as a reference for proper
methodology.
• The Court looked at the leases and the interactions historically with
the parties and found that the leases would be considered by any
buyer. Based on the actions of the tenant and the owner, the Court
determined that there was a low probability that the leases would be
terminated voluntarily or even with relatively small consideration.
• Ranch had been used by the tenant for many years and was
negotiated at arms length
• The tenants at the Beachfront property had attempted to buy the
house on several occasions and the owner had rejected all offers.
They finally offered to lease the property and the owner accepted.
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Mitchell v. Commissioner –
T.C. Memo. 2011-94 (April 2011)
What are lessons learned? (Continued)
• Be careful of comparable sale selection. The Court found that sales
that were not current were less reliable and gave more credence to
report with the most recent sales. Also, sales from the immediate
market area were more weighted than sales from outside the area.
• Be careful of adjustments that are not reasonable. One reason IRS
appraiser’s opinion on the ranch was rejected was an adjustment of a
sale 6 years prior using a 2% per month (24% per year) increase from
1999 to 2005. The Court’s analysis suggested 4% per year more
reasonable.
• When dealing with leased properties, you have to look at the leases
carefully unless they are obviously arm’s length. For example, a
Walgreens leased property would not require a lot of due diligence.
However, what if the leased property included some parties in a
family on both sides of the lease? These are important facts that
should be discussed with the appraiser.
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Boltar LLC v. Commissioner
» Excluded Expert’s Report under Federal Rules of
Evidence and Daubert
» Emphasized “Gatekeeper Role”
Boltar LLC v. Commissioner
» The Boltar case resulted in the taxpayer’s report being excluded by the Court.
» The property was a Conservation Easement. However, the lessons learned
here are valid in all types of work when dealing with the IRS. Careful
adherence to IRS rules and regulations are important. However, following
proper methodology and avoiding mistakes is also important.
» In the Boltar case, the IRS challenged the report of the Taxpayer. The IRS “filed
a motion in limine to exclude the petitioner's expert report and testimony as
neither reliable nor relevant under the Federal Rules of Evidence and Daubert.
» The Tax Court determined that the Taxpayer’s expert’s report was “so far
beyond the realm of usefulness that admission is inappropriate and exclusion”
is proper. The Taxpayer had no other expert report, and the Court relied only
on the IRS valuation. The result was the Taxpayer lost a $3.0 million dollar
deduction from the donation.
Boltar LLC v. Commissioner
The Property:
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The property was 8.5 acres in Lake County, Indiana. Part of
the land was wetlands. Part was in the City of Hobart and
part was in Lake County. The County portion was zoned for
low density single family development. The City portion
was zoned PUD. There were no utilities available to the
property and it was land locked with no legal access.
Boltar LLC v. Commissioner
The Appraisals:
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The Taxpayer appraiser valued the property at $3,340,000 under the
highest and best use for development of 174 condominiums. This was
based on a site plan for a ten acre parcel (Scenario A). Scenario B valued
the property as vacant development land at $68,000. The Taxpayer
appraiser stated that the value of the easement was the difference
between the Scenario A and B values. It was not defined as a “Before
and After” analysis as required by the regulations. The value estimated
for the easement was $3,245,000 and also reflected mitigation costs.
•
The IRS appraiser concluded that the highest and best use was for low
density single family development. The easement was valued by the IRS
appraiser at approximately $30,000. This was based on a “before” value
of approximately $400,000 and an “after” value of about $70,000.
Boltar LLC v. Commissioner
Problems:
» Appraiser assumed that all property was in City of Hobart which it was not.
» The Court indicated that the highest and best use established by the taxpayer
Report was not reasonable. The Court cited other court cases noting that
highest and best use must be “realistic” and reflect “objective potential uses,”
and such uses must be “reasonable and probable.”
» In establishing the highest and best use, the Taxpayer appraiser relied on a
ten-acre site plan even though the subject property was only 8.5 acres.
» The site plan ignored a 50 foot gas pipeline which crossed the property. The
plat map showed that 6 of 29 proposed buildings could not be built.
» The Taxpayer appraiser valued the property before the easement at $400,000
per acre. The Court noted that nearby land for similar development was
selling for $12,000 per acre. According to the Court, such “factual errors” defy
“reason and common sense” and “demonstrated [a] lack of sanity in their
result.”
Boltar LLC v. Commissioner
Problems: (Continued)
•
The Court determined that the Taxpayer appraiser’s methodology was
flawed. Rather that stating the analysis was a “Before and After”
analysis, he stated the value was based on the “difference in two
scenarios” defined as Scenario A and B. While the actual process was
correct, the report used the wrong terminology.
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Finally, before trial, the Taxpayer’s appraiser was given the chance to
revisit some of the issues like ignoring the easement, or correcting the
proper jurisdiction. The appraiser chose not to make any corrections
and stood by the faulty report. The Court noted that the Taxpayer
Appraiser “did not suggest any adjustments or corrections to their
calculations but persisted in their position that the original appraisal
was correct, even when admitting factual errors.”
Boltar LLC v. Commissioner
Lessons Learned:
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Make sure facts are correct.
Court will always look at highest and best use. Make sure it is
reasonable and well-supported.
When valuing a property and you are not preparing a Sales Comparison
Approach, it is always best to look at sales data in the area anyway. If
there is data, explain why it is not comparable and why adjustments
can’t reasonably be made. The Court understands a Sales Approach.
When sales are not addressed in a report they show up in other
evidence (like the IRS appraisal in this case). It could then appear that
the appraiser is not being objective. If there are sales nearby that might
in any way be considered comparable, they should be disclosed and
explained away.
Boltar LLC v. Commissioner
Lessons Learned:
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•
In this case, methodology was again an issue. Make sure you actually
state and describe the methodology. The math might be correct, but if
it is not described properly, the report may be rejected.
Final Note is actually a warning to the appraisal profession by the Tax
Court. As a closing comment, the Court explained that a Daubert gatekeeping role for the Court is required because “the cottage industry of
experts who function primarily in the market for tax benefits should be
discouraged.” The Court notes that all too often, “[t]he problem is
created by [expert’s] willingness to use their resumes and their skills to
advocate the position of the party who employs them without regard to
objective and relevant facts, contrary to their professional obligations.”
In this case, the faulty appraisal by a single individual led to a
condemnation of all valuation practitioners by a federal judge.
Boltar LLC v. Commissioner
136 T.C. No. 14 (April 5, 2011)
Closing Comments from Case:
» “[w]e have long recognized that receipt of unreliable evidence
is an imposition on the opposing party and on the trial
process. We have also frequently stated that an expert loses
usefulness to the Court and loses credibility when giving
testimony tainted by overzealous advocacy. Expert opinions
that disregard relevant facts affecting valuation or exaggerate
value to incredible levels are rejected.”
» While “[j]ustice is frequently portrayed as blindfolded to
symbolize impartiality, … we need not blindly admit absurd
expert opinions.”
Mohamed v. Commissioner – May 29, 2012
Overview of Facts and Decision:
1. IRS moved for summary judgment to disallow any deduction. The taxpayer
sought relief due to substantial compliance with the regulations.
2. In 2003 Mr. & Mrs. Mohamed donated five properties worth several million
dollars to a charitable trust for the benefit of the Shriner’s Hospital.
3. Mr. Mohamed was an appraiser and broker. He filled out the donation form
using his own estimates and claimed he did not read instructions.
4. Mohamed obtained independent appraisals showing values were actually
higher than he claimed ($20 million vs. $18 million claimed) and some of the
properties subsequently sold at near the appraised values.
5. Result of the case was a complete denial of all deductions.
Mohamed v. Commissioner – May 29, 2012
Closing Remarks from Judge Holmes:
We recognize that this result is harsh--a complete denial of
charitable deductions to a couple that did not overvalue,
and may well have undervalued, their contributions--all
reported on forms that even to the Court’s eyes seemed
likely to mislead someone who didn’t read the instructions.
But the problems of mis-valued property are so great that
Congress was quite specific about what the charitably
inclined have to do to defend their deductions, and we
cannot in a single sympathetic case undermine those rules.
Mohamed v. Commissioner
Lessons Learned:
1. Warning to taxpayers – hire experts and come prepared to the tax
court or face the wrath of the court.
2. When non-cash donations are at stake, experts must be Qualified
Appraisers who submit Qualified Appraisals as defined by the
Treasury Dept., not USPAP.
3. Self-Dealing / Representation is inappropriate for tax court matters
(“No appraisal, no donation.”)
4. Petitioner failure to comply with treasury regulations is a recipe for
disaster in tax court.
5. Expect strict interpretation of the laws/regs by the tax court. There is
no begging for mercy.
Astleford v. Commissioner (May 5, 2008)
MARKET ABSORPTION
• Market absorption is a recurring issue in appraisals prepared for the IRS in
gifts, estates, and other uses.
• If there is a concentration of similar properties in a given area, market
absorption must be considered.
• The Tax Court has addressed market absorption very infrequently.
Astleford the most recent in 2008 and addressed market absorption. The
prior case on the same issue was the Estate of Auker in 1998.
Astleford v. Commissioner (May 5, 2008)
The Property and Appraisals
• The Astleford case involves a 1200 acre farm in Minnesota.
• The average farm size was 160 acres and that the subject property was
extraordinarily large.
• Appraiser valued the property if sold in smaller parcels over time.
• Valued the property at $3,100 per acre for a total value of $3.7 million. He
projected values forward to increase at 7% annually and discounted net
revenue at 25% IRR over 4 years. He deducted costs of sales and holding.
The resulting value was $2.2 million.
• The IRS valued property at $3,500 per acre for total value of $4.2 million
with no consideration to size or market absorption.
Astleford v. Commissioner (May 5, 2008)
The Astleford Court built on the decision in the Auker case where the Court laid
out the steps to determine a market absorption discount using a process
described as a “five part analysis.” The Court determined the following steps:
• “First, we examine the assets to be valued and categorize the assets by type.”
• “Second, we ascertain the market value of each asset in each category,
assuming that each asset will be marketed separately.” – Retail Value
• “Third, we compare the number of assets in each category to the number of
assets of that type which are traded in the market over a reasonable period of
time.” - Absorption Rate
• “Fourth, we ascertain how much longer than this reasonable time period it
would take to sell at market value each asset that could not be sold in this
reasonable time period.”
• “Fifth, we discount the value of each asset in the category of assets that cannot
be sold within a reasonable time period, taking into account the time value of
money and the period of time that the category of assets would have to be
marketed in order to sell each asset therein.”
Astleford v. Commissioner (May 5, 2008)
The Court’s Opinion
 In Astleford, the Court agreed with the IRS appraiser’s value per acre.
This adoption was based on the credibility of the testimony. However,
the Court used a market absorption method. The judge dropped the
discount rate from 25% to 10%. Unlike Auker, the court deducted holding
costs and sales expenses. The result was a value of $3.3 million.
 This is a case where the Court valued the property independently of the
appraisers using some data from each appraisal, and using his own
opinions where data was not presented such as the discount rate. It was
not a complete taxpayer victory, but an important decision none-the-less.
Astleford v. Commissioner (May 5, 2008)
Lessons Learned:
• When you have a portfolio of similar properties, the Court allows or
requires that you address market absorption.
• Make sure discount rates are reasonable for the highest and best use.
Court noted that 25% was a land development rate and that returns
for farming would be more in line with 10%.
• Make sure that sales data used is reasonable and explained properly.
• If you are not from the local area, make sure you go beyond typical
due diligence to make sure that your opinions will be given credence.
There is a bias toward local knowledge.
• Also, don’t forget to use standard methodology. Note that Court
allowed deduction of taxes and commissions in DCF. Make sure the
methodology has a basis in appraisal literature.
Scheidelman v. Commissioner
(July 14, 2010)
• Issues:
• Façade Easement
• Qualified Appraisal
• “Before” vs. “After” or Percentage Discount
Scheidelman v. Commissioner
(July 14, 2010)
• The property is a single-family row-house located in a historic preservation
district in Brooklyn, New York.
• In June 2004, the taxpayer executed the historic conservation easement
deed with National Architectural Trust (aka NAT).
• The taxpayer claimed a charitable contribution deduction of $115,000 for
the contribution of the façade easement.
Scheidelman v. Commissioner
(July 14, 2010)
The taxpayer’s application failed to meet the standards set forth for a
Qualified Appraisal as defined under Section 170 of IRS regulations. The
appraisal failed in several tests including:
• It did not have a sufficient description of the property to identify it;
• It did not include the terms of the deed of easement;
• It did not include a statement that it was prepared for income tax
purposes (Intended use); and
• It did not provide the method and specific basis for valuing the
easement.
Scheidelman v. Commissioner
(July 14, 2010)
Court Ruling:
The Court ruled that the Taxpayer appraisal report did not meet the test of
being a Qualified Appraisal Report due to deficiencies including:
• Methodology - The report did not provide the method and specific basis
for valuing the easement. Taxpayer appraiser stated that the “after” value
was “based on consideration of a range of discounts that the IRS has
historically found to be acceptable as well as historic precedents” in the
range of 10% to 15%. The Court stated that this did not constitute a
“Before and After” analysis as required by law. The Court noted that “the
appraiser’s report failed to outline and analyze qualitative factors for the
taxpayer’s property in support of the value.” In other words, you have to
estimate a separate value “after” the easement is placed, not just a
discount from the “Before” value.
Scheidelman v. Commissioner
(July 14, 2010)
• Terminology – The report did not include a statement that it was prepared
for income tax purposes. The intended use was not properly stated.
• Descriptions – The Report did not properly describe the property or the
easement.
• The (Taxpayer’s) report used only estimates based on prior cases and
displayed no independent or reliable methodology applied to the subject
property as the basis for the valuation reached. Thus, we conclude that
petitioners have failed to comply with the substantiation requirements
under section 170(f) and section 1.170A-13, Income Tax Regs.
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